Friday, June 27, 2008

Corn the puppet master

Corn continued to pull the strings across the grain complex this week. Corn went up and down during the week to finish 10US¢/bu lower, at 755US¢/bu. Wheat continues to move lock-step with corn, and gave up 15US¢/bu for the week, to close at 907US¢/bu. With nearly 30% of the US corn crop destined for ethanol production, corn prices will be increasingly influenced by the energy sector.

The weak finish for corn was partly a result of the fall in crude oil prices back from near-record highs, as OPEC said it will increase production and China said that would cut fuel subsidies. US ProFarmer has commenced its annual crop tour and reckons the corn crop could still turn out close to current USDA estimates, at around 11.5 billion bushels (USDA 11.735 billion bu).

The floods have put a number of ethanol production facilities out of action, which will ease corn demand in the short-term – although it will also knock a hole in ethanol reserves. Ethanol is currently priced at levels at which discretionary blending is occurring (which means it is competitive with gasoline).

Wheat quality an issue?
After not having rained nearly all growing season, it now won’t stop raining across the US southern plains, where harvest has been delayed and quality concerns are increasing. Eastern US wheat areas (where all the big rain has been) will now battle disease.

Wheat quality concerns are also being raised by our European contacts. They are hoping for some dry weather in southern areas, so harvest can commence over the next week or two. Some good rain was received in Argentina and in eastern Australian growing areas. At this stage, there is not enough happening in wheat to divert the market’s attention from US corn crop problems. Black Sea wheat is being priced off US corn into Asian livestock markets.

Oilseeds firm
Oilseeds continue to follow corn and oil. China was a big buyer of new crop soybeans, but cancelled some old crop orders. The Argentine farmers strike continues and there were rumours of some export business for Canadian canola. Rain on the East Coast has bought the NSW canola crop another one to two months.

Basis the shock absorber
Australian values largely held onto recent gains, with basis acting as an insulator against changes in international futures and gyrations in the $A. There is very little action in west-coast old crop markets. On the East Coast, higher old crop wheat values are mainly being driven by domestic demand and a potential July squeeze on track and ASX contract.

It looks as though the East Coast will likely be short old crop wheat, with solid demand from poultry and dairy industries and not much surplus supply. Export demand is slow, apart from specialty wheat such as Durum and Soft Wheat.

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